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Here's Why Pandora Media Inc. Is Beating Apple

Pandora (NYSE: P) has been beaten down of late. The momentum name is down nearly 30% over the last month. This comes despite the fact that Pandora posted growing listener hours on a year-on-year increase in the number of active listeners and a higher share of the radio market in the U.S. for the fourth quarter. Yet, investors remain concerned about the company's growth opportunities. However, the market appears to be overreacting.

Still growing Investors overreacted on the February news that the company saw no increase in its base of active listeners. Investors took this as the market reaching a saturation point and that future growth would be difficult and costly. But things appear to be picking up.

For the month of March 2014, Pandora reported a 14% increase in listener hours to 1.7 billion compared to 1.49 billion in the same month of the previous year. In addition to this increase, its market share in the U.S. radio market increased to 9.1% versus 8.05% for the same period last year. Its active listeners increased 8% from 69.5% in the previous year to 75.3% this year.

Stacking up the competitionFrom 2009 to 2013, Pandora's revenues jumped from around $55 million to $427 million. But over that same period, its net loss has increased from $16.8 million to $38.1 million. This comes as the company has been increasing its spending on sales and admin expenses to attract more listeners.

Compare this to Sirius XM Radio (NASDAQ: SIRI) , which over the same period grew revenues have from $2.5 billion to $3.8 billion, a jump of 32%. Its subscriber base increased from 18.8 million to 25.6 million. Sirius XM's bottom line has also improved significantly from a loss of $352 million to a profit of $377.2 million from 2009 to 2013.

The market is willing to accept some degree of losses, as long as Pandora is growing rapidly. Apple's (NASDAQ: AAPL) iTunes, which was released in mid-2013, has yet to be the Pandora killer that it was once assumed to be. Pandora has survived the initial onslaught thanks to its first-mover advantage.

Pandora's competitive advantagePandora is still enjoying its first-mover advantage, being the pioneer in the customized music streaming service space. It was able to successfully convert its advantage into significant advertising revenues on the strength of its large Android listener base. Over 80% of Pandora's revenues are generated from ads. Compared to Spotify, which gets 80% from subscription fees, Pandora has figured out how to attract advertisers.

But the thing is, Apple is no ordinary competitor. The tech giant has a very large cash pile and it controls a large ecosystem (thanks to the number of iTunes accounts), which means Apple already has a large potential listener base. But personalization is important for consumers, and Pandora's Music Genome Project (its personalization algorithms) is helping insulate the company from its competitors.

The exaggerated impact of the price hikePandora's recent hike in its Pandora One service by $1 to $4.99 per month was its first hike since the service was launched. The revised price will only apply to new subscribers and will not affect existing ones. It is also ending the yearly subscription option and moving all subscribers to monthly plans. Average revenue per subscriber is bound to improve from last year and the increase will flow directly to the bottom line.

Bottom lineFor investors looking for a beaten-down momentum stock, Pandora might be worth a look. The company has no debt and is expected to grow earnings at an annualized 40% over the next five years. The company still has a first-mover advantage and continues to grow revenues despite new competition.

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I really enjoy using Spotify. It definitely has all the music I like, especially oldies. I use the OSX app on all my computers. It can even access my iTunes library. I really like the Spotify user interface.

I never thought that iTunes Radio was supposed to be a Pandora killer. I don't see why they can't exist side by side. Pandora is a nice subscription service but it will never be able to monetize the way Apple can do with iTunes. I think Pandora will survive but I would think it's a company that should have a market cap of around $2 billion.

iTunes Radio is more like reinforcement for Apple's iTunes music sales. However, I do listen to iTunes Radio and I like it. Apple has made it a lot easier to fine tune radio stations to the songs I want to hear. It takes practice and experimentation but as far as I'm concerned it gives very good results. I listen to Freestyle, Italo-Disco, Disco and EuroDance and I've tailored a pretty good station for my listening.